How you are taxed in Cyprus: Income tax, defence tax and capital gains tax

Find out why Cyprus offers tax appeal for expatriates and how you can become resident to secure relatively low taxes on income, pensions, investments and capital gains.

With a year-round warm climate, rich culture and history, genuine hospitality and stunning scenery, it is easy to see why living in Cyprus continues to appeal to expatriates. Thanks to the generous tax regime, it can also make financial sense to become resident here.

What makes you tax resident in Cyprus?

Residency rules in Cyprus used to be very simple: you would be considered tax resident if you spent more than 183 days in Cyprus in a calendar year. But since 2017, residency can also apply to people who spend more than 60 days a year in Cyprus and have both a permanent home and business connections here. To meet this new residency test, you cannot be tax resident elsewhere and must spend fewer than 183 days in any other country each year.

If you are Cyprus resident, your worldwide income is taxable here. Non-residents are only liable for taxes on income arising in Cyprus, such as capital gains on local real estate.

Residents only face taxation on investment income if they are also domiciled in Cyprus (generally only the case if you were born here or have lived in Cyprus for 17 years or more).

Unlike many other countries, Cyprus has no wealth or inheritance taxes.

Tax on income

For Cyprus residents, income tax is payable on employment, pensions and rental income. The first €19,500 of income is tax-free; beyond that, rates range from 20% to 35% for income over €60,000.

If you are employed abroad for over 90 days a year, your entire salary may be free of Cyprus taxes. This applies if your employer is not tax resident and does not have a permanent establishment in Cyprus (although your earned income may still be taxable in the country of origin).

Income

Income tax rate

Up to €19,500

0%

€19,501 - €28,000

20%

€28,001 - €36,300

25%

€36,300 - €60,000

30%

Over €60,000

35%

Tax on investments: Defence contributions

While most forms of investment income, including bank interest and dividends, do not attract income tax, they are taxable in the form of ‘defence contributions’. (Capital gains on shares are not taxed in Cyprus, see below). However, since 2015, only Cyprus domiciles who are also resident have to pay it. Most expatriates – unless Cyprus-born or resident for 17 of the last 20 years – will therefore escape ‘defence tax’ for their first 17 years of residency.

For residents who are Cyprus domiciled, defence contributions on worldwide investment income is 17% on dividends, 30% on bank interest (3% if total income is under €12,000) and 3% on rental income (on 75% of gross income only).

Note that rental income is subject to both income tax and defence contributions.

Tax on pensions

Foreign pension income receives special treatment in Cyprus, being taxable in one of two ways. You could either opt for a flat rate of 5% (with a €3,420 allowance) or add it to your annual income and pay the relevant scale income tax rates, ranging from 20% to 35%. You can choose whichever method works best for you each year.

Through the UK-Cyprus double tax agreement, all UK pensions are taxable solely in Cyprus, so you will not pay tax twice. The good news for retiree expatriates is that pension lump sums do not attract Cyprus taxes, so it is possible to take portions of your UK pension as cash without paying tax in either country. However, this does not apply if you take the entire fund as a lump sum – if you do, 75% is taxable in the UK.

Cyprus residents can transfer UK pensions to an EU/EEA-based Qualifying Recognised Overseas Pension Scheme (QROPS) tax-free. Choosing a Maltese QROPS, for example, enables you to also withdraw pension income tax-free (under the terms of the Malta-Cyprus double tax agreement).

Some potential bad news is that if you have a UK government or local authority pension – including civil service, teachers, armed forces and some NHS pensions – the tax situation could change next year. Currently, unlike most other countries, these pensions are taxable solely in Cyprus for residents here, at rates as low as 5%. However, a revised UK/Cyprus tax treaty is expected to come into effect in January 2019 that will pass exclusive taxing rights on government service pensions to the UK. While you will still only pay tax in one country, you are likely to face less favourable tax treatment than in Cyprus.

Even if this does not affect you, it is a good idea to take personalised, regulated advice about your pension options, especially if you are considering transferring.

Cyprus taxes on different types of income

Income type

Income tax rate

Defence tax rate

Interest

Nil

30% (or 3% if your total income is under €12,000)

Dividends

Nil

17%

Rental income

Scale income tax rates

3% (on 75% of gross income)

Foreign pension

5% flat rate over €3,420OR Scale income tax rates (your option)

Nil

Domestic pension

Scale income tax rates

Nil

Tax on capital gains

Capital gains tax is only payable on gains on the sale of real estate located in Cyprus. A flat rate of 20% applies, regardless of whether you are resident in Cyprus. However, this does not apply on death or on transfer of assets between spouses or family members.

There is no Cyprus taxation on the sale of shares or foreign assets, so property in the UK is exempt from taxes in this country. You would, however, attract non-resident capital gains tax in the UK on growth since April 2015.

Similarly, while there is no inheritance tax in Cyprus, if you are seen as UK domiciled you would still be subject to 40% UK inheritance tax on your worldwide assets. Seek specialist advice on how to mitigate this tax.

Overall, Cyprus can be a very tax-efficient home away from home. Not only can Cyprus residents enjoy tax-free withdrawals on investment income, they can also take advantage of investment vehicles that allow income and gains to roll up tax-free. Talk to a locally-based adviser with cross-border expertise to secure the best results for your unique circumstances and goals. With Brexit only months away, there will never be an easier time to lock in Cyprus residency and associated benefits than today, so act now.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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Who We Are

Blevins Franks has been providing specialist financial advice to British expatriates across Europe for over forty years. Our expertise covers tax, estate planning, pensions and investment management to offer a genuinely holistic approach to financial planning.

If you’re living abroad, thinking about moving, or planning to return to the UK, we can help you make the most of your wealth in the most tax-efficient way possible.